The petroleum legislative framework for Lebanon

Now is the time

Now that Lebanon has signed the first two exploration and production agreements (EPAs) for offshore oil and gas, companies will prepare the groundwork to start drilling at the beginning of 2019. This achievement is a long time coming. The first oil-related legislation, the Offshore Petroleum Resources Law, was enacted in 2010; the sector’s regulator, the Lebanese Petroleum Administration, started operating back in 2012; the block delineation and the model EPA were enacted as decrees in January 2017, almost four years after they were first drafted; and the petroleum-income tax law—a necessity to complete the Lebanese petroleum fiscal regime—was enacted in October 2017, two years after it was first drafted.

This process has taken far too long. Egypt started production of the giant Zohr gas field within three years of finding it. But the constant delays that Lebanon’s oil and gas sector witnessed over the past years—very much interconnected to major regional crises—should not be the reason for interest groups such as Lebanese Oil and Gas Initiative (LOGI) to be blasé when evaluating the current efforts to complete the legal foundations of the sector, which are a prerequisite for a successful, well governed, well invested, and regulated sector. The late arrival of LOGI to the game does not mean the work that has been done over several years needs to be halted because LOGI thinks so.

There are still very important laws that need to be enacted to promote confidence in the Lebanese petroleum investment climate, ensure transparency toward the public—the ultimate owner of any resources found—and lay down solid legal and governance foundations for operating the sector. Four important laws are currently at the initial stages of the parliamentary process: They cover the establishment of a petroleum asset-management department, a sovereign wealth fund (which this author helped draft), and a national oil company, as well as prospects for onshore exploration. The proposed legislation is not being hurried through Parliament, but rather is being discussed at length in subcommittees. The fact that Lebanon currently has the right set of circumstances to make up for the years that we missed should not be mistaken for the conspiracy theory that the laws are being rushed.

These laws have been prepared by very capable Lebanese policymakers and legislators for more than two years. It is vital in any policymaking process to involve interest groups, the media, civil society, and independent experts. It is also essential that Lebanon not fall into the trap of the resource curse, a situation where countries rich in resources tend to have poorer economic growth, flawed democracies, and less development than those without. Interest groups and experts are rightfully highlighting the risks—however, they should know that these laws have been proposed to protect us from the resource curse, and so should be careful about what kind of messages they are trying to send to the public. Halting the laws is not the solution, reaching out to the legislators behind them and providing constructive comments is far more useful. Joining in the efforts to achieve the ideal legislative framework is more productive than campaigning against the need for new laws.

Additionally, last year’s Right of Access to Information law, the Petroleum Transparency Law—which is reaching the final stages in parliament committees—and the plan to join the Extractive Industries Transparency Initiative will all contribute to the transparency of the sector.

The Lebanese economy has struggled for many decades to overcome various internal and external hurdles on the path to proper growth, and is currently at a quarter of its true potential. The proposed petroleum-related laws are important building blocks toward this holistic approach, and there is no shortage of talent in Lebanon to achieve the vision we all share.

Here is a summary of the four laws that have recently been referred to parliamentary committees with a brief explanation of why they are essential:

1.Petroleum Asset Management Department (PAD) Law: This law would establish a new department under the Ministry of Finance with two major duties. The first is to assist the Minister of Finance in drawing up an investment mandate for the sovereign wealth fund (SWF), which would then need to be approved by both the Council of Ministers and Parliament. Following best practice worldwide, the investment mandate would be a technical document prepared by experts at the Ministry of Finance and approved by the government, setting out general guidelines for the SWF in the context of Lebanon’s macroeconomic policy, including risk tolerance of the investment choices. The role of the SWF is to manage the funds and not to design fiscal or investment policies; the investment mandate, prepared worldwide by policymakers at the Ministry of Finance, presented by the minister, and approved by government, is designed to ensure the SWF is in line with the central government’s vision for the economy. The second role of the PAD is to audit the companies operating in the petroleum industry to ensure the proper collection of the 20 percent income tax. Auditing petroleum activities is a new responsibility for Lebanon, and the proper experts should be hired to support the MoF in its revenue collection role.

2. Sovereign Wealth Fund Law: The cost of debt in Lebanon has become very high, and economic fundamentals would suggest that debt should be paid down with any influx of extra government funds before attempting to generate higher returns in financial markets. But this logic is flawed and dangerous in the context of Lebanon. The problems of chronic debt, lack of investment in infrastructure, failing public services, and high yearly deficit are not caused by a lack of funds, so using income from petroleum activities to pay down the debt is not the solution.

Public-private partnerships can resolve the infrastructure and public-services problem, while cutting non-productive subsidies and improving the tax-collection system can solve the chronic deficit and debt problem. Income from non-renewable resources should be turned into off-balance-sheet renewable financial resources for future generations, to be used only under strict terms and in the right sectors of the economy.

The current draft of the SWF law has very strict fiscal rules for spending, and only allows minor alleviation of the debt burden in the specific case where the government has turned its chronic deficit problem into a debt-sustainable primary surplus—a major achievement, if it were to take place. More importantly, the law ensures checks and balances based on the best corporate governance practices, helping the board of the fund, the finance minister, the cabinet, Parliament, internal auditors, two external auditors, the PAD, and the SWF management interact without overstepping their responsibilities. Moreover, it ensures full transparency of operations by publishing all reports online.

It will take several years to have an able home-grown team in place to manage such a fund, so any delay now will be magnified down the road. The tens of millions of dollars already generated by selling geophysical data to companies could be the seed money for the fund. Lebanon has always been a borrowing country, so launching a culture of savings is important. The fear of building new institutions, overstaffing them, and causing wasteful spending is justified, given the weak corporate governance practices in Lebanon, but should not be a reason to choose the do-nothing approach. Rather, it should encourage a do-it-right approach.

3.National Oil Company (NOC) Law: This law does not establish the NOC, but rather organizes its corporate governance, defines the participation methodology of the government, and starts consolidating government oil and gas assets under one legal entity. The law clearly states that the NOC will be established in accordance with the 2010 Offshore Petroleum Resources Law (OPRL), which states it must be established by a cabinet decree—and after the proof of commerciality, not right away, as some misinformed experts suggested. Hence, this law would send the proper signal to international oil companies about the methodology of government participation. The objective is to be transparent about the incentives of the government in future licensing rounds since the participation method of the state will impact the economics of future exploration and production agreements.

4. Onshore Exploration Law: As the OPRL covers only offshore exploration, production, and decommissioning activities, a legislative framework is clearly missing for any onshore activities, which are usually very different in nature, but equally important to organize the activities of the sector as a whole. This law would set the scope of onshore activities including development, production and decommissioning, the ownership of resources, the methodology for land expropriation, the participation of the state, the role of different government entities, and the preservation of any cultural or historic heritage, among other important components that the OPRL similarly covers.